Buy or Rent?

[piedpiper]

After reading WCI, my initial inclination to buy a home upon starting residency is in question. I am a MS4 and have matched into a surgical subspecialty with a 5yr residency. My wife and I are very fortunate to have no student loans or outstanding debts. We have no children (yet! we plan to towards the end my training). She is an RN so our combined gross income will be ~$100k. Additionally, my wife's family has left her an inheritance in the form of CD's and mutual funds that will allow us to put between 20-40% down on a home. She has significantly better (more) credit than I do given that she has purchased and paid off a car in the last 3 years. We are moving to a mid-sized, moderately affordable city for residency and really have no idea about where to start with determining price range, mortgage estimates, down payments, etc.

Thanks for any advice!

[artemis]

If you leave the area after your residency and can't sell the house for a reasonable price, are you willing to play long-distance landlord?

[piedpiper]

That's certainly one of our concerns. We do plan to live in the same general area for practice. There are several comparable cities within 2-3hrs of where I'm training. Both of our families are within 2hrs of my residency. Renting might be a feasible option for a short-term solution, but for how long we're not entirely sure.

[Bleu]

I wish I had rented during my 3 year residency.  I bought in '06 and sold in '09.  House went from roughly 300k -->  $270k (minus closing costs, real estate agent fees, etc.).  My monthly payments made almost no dent in the principal during that time.  Im thankful I didn't have to replace a roof or AC unit or anything in that time.  It was bad, but coulda been worse I suppose...

[jfoxcpacfp]

What are your top 3 reasons for wanting to buy rather than rent while in residency?

[DMFA]

Hmm...and that's a very long hmm...

Do NOT buy into this "homeownership is the American dream" mentality.  That's what HGTV and realtors want to sell you.  It can NOT be an emotional decision to buy a house.

Would there be any fee or penalty to liquidating the inherited accounts?  Honestly I'd chuck the CDs for other holdings, but that's not what you asked.

Renting is safer since you won't find yourself in a money pit if anything goes wrong (like repairs) and don't have to worry about home value.  Also with your low income, the tax deduction from mortgage interest and property tax won't be worth as much.  A down payment would be helpful (esp 20%, avoid PMI) to avoid the negative equity (caused by rolling in closing costs without putting anything down), but idk if you really want to liquidate your holdings.

If you'll be in the house for five years, the overall math says you'd probably benefit from owning a home (5 years is a commonly quoted breaking point), but renting is the far less risky option in case anything major happens, not only to your home, but for your or your wife's jobs, etc.

I'm not sure there's really a *wrong* decision as long as you recognize the full array of risks and variables you take on when buying a home.  Renting is usually a greater expense than the property is worth, and none of it goes toward your net worth, but you assume so little comparative risk and obligation by doing so.

[piedpiper]

1- We think it would be a good investment. We're currently debt-free and able to put sufficient money down. We have lived in this city before and feel like we've got a sense of where we would like to live. Its a 5yr residency which gives us time to "break even" and potentially use it as a stepping stone for a down payment on a future house. However, I do understand that it's likely naive to think that we can turn around and sell for a reasonable price immediately coming out of training.

2- Autonomy- we've had a checkered history with landlords in medical school. I feel like we've been great tenants (always pay rent on time, clean, respectful, etc.) but we've had our fair share of maintenance issues and repairs that often were neglected for weeks to months.

3- "Everyone else is doing it"- This is certainly a question for my future co-residents as well, but nearly all of them chose to buy instead of rent.

[jfoxcpacfp]

1. Possibly, but you also have the opportunity to invest the inheritance into a diversified basket of equity mutual funds over the next 5 years rather than concentrate all in real estate. Would you put the whole inheritance into one REIT fund? (I hope not.) Then why further strain the soup to a single house? If you're flexible on your purchase date after graduating training, you can almost certainly outstrip any gain to be had by putting all of your eggs in one basket.


2. Not a good argument. Do better research. Anecdotal evidence only proves that an anecdote exists.


3. Worst argument. When has "everybody else" ever been right about investing?

[Zaphod]

It may be, but its extremely unlikely to be so. After running transaction, maintenance costs, etc...and accounting for your zero time or desire to mess with house hold stuff in residency, it will likely be a poor investment. Its also unlikely you'll want to live in the same house as an attending as you did during residency. Having to concern yourself with selling a house while searching for a job and new place is not any fun at all.

I didnt break even after 7.5 years, and still paid to "sell" the house. There are no guarantees.

Everyone else has no idea why they even have the motivation that they do anyway, its all manufactured and part of "growing up, etc.." which is total bs. Owning a house is a hassle, you want the least amount of hassles in residency as possible. Get a nice apartment where maintenance issues are timely or nil. Everyone else is also likely to be exceedingly in debt and unaware of basic financial knowledge.

Owning a house for no reason in residency is one of my bigger financial regrets besides simply not knowing anything. Its beyond dumb unless you have some very specific situation or long term plan (family, a pp to go to in same town, starting a rental empire, etc..).

Put your money into an emergency fund, retirement, and the market.

[DMFA]

piedpiper wrote:

1- We think it would be a good investment. We’re currently debt-free and able to put sufficient money down. We have lived in this city before and feel like we’ve got a sense of where we would like to live. Its a 5yr residency which gives us time to “break even” and potentially use it as a stepping stone for a down payment on a future house. However, I do understand that it’s likely naive to think that we can turn around and sell for a reasonable price immediately coming out of training.

2- Autonomy- we’ve had a checkered history with landlords in medical school. I feel like we’ve been great tenants (always pay rent on time, clean, respectful, etc.) but we’ve had our fair share of maintenance issues and repairs that often were neglected for weeks to months.

3- “Everyone else is doing it”- This is certainly a question for my future co-residents as well, but nearly all of them chose to buy instead of rent.

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jfoxcpacfp wrote:

1. Possibly, but you also have the opportunity to invest the inheritance into a diversified basket of equity mutual funds over the next 5 years rather than concentrate all in real estate. Would you put the whole inheritance into one REIT fund? (I hope not.) Then why further strain the soup to a single house? If you’re flexible on your purchase date after graduating training, you can almost certainly outstrip any gain to be had by putting all of your eggs in one basket.


2. Not a good argument. Do better research. Anecdotal evidence only proves that an anecdote exists.


3. Worst argument. When has “everybody else” ever been right about investing?

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Johanna is right about all 3 of these things.

1. Do not think about home buying as your primary residence as an investment.  Yes, it does have several attributes of an investment and needs to be properly handled and maintained, but it's a required living expense that you happen to get a little bit back out of when you leave.  If you get your average mortgage, only about 20% of what you pay each month will actually go into your equity; the rest goes to interest, tax, and insurance.  That's not even including any repairs or improvements which need to be made.


2. If you think landlords' neglect of home issues is possibly problematic, have you ever experienced a resident's (let alone a surgical resident's) time management with regard to home repairs?  A lot of months, all you're going to want to do outside of the hospital is sleep (or drink, if you do that).  Let me tell you how much of a pain it is to get to the Blue or Orange Store to get your equipment and get 'er done (God help you if you have a baby to take care of during that) while you're on an 80 hr/wk rotation.  Trust me, I like doing house stuff, and finding time to do it while balancing work and family is tough.  Now that I'm out of residency (still a fellow, but more $), it's more worth my time to pay someone for it.


3. I'm not sure I've ever met as financially clueless a bunch of people as pending and recent medical graduates.  I bet some of them took our horrendous mortgages despite having large student debt.

Now, none of that necessarily makes buying a house wrong, and I am NOT out to dissuade you from buying a house because, even after all the practical and financial decisions, it is still a complex personal/family decision.  You NEED to look at this decision from the correct perspective and dispel all your misinformation before proceeding, though.

 

[jhwkr542]

I think you'd be lucky to break even.  My wife and I did buy to start residency, but 1. we didn't know what we were doing 2. we planned to live in the area after residency and here were are 6 years later and 3. we started residency at/near the bottom of the housing market/crash and were pretty sure of this fact.  Now, 6 years later, the house has gone up in value around $40k, but we've put a lot of money into it.  I think we had about the best possible outcome, and the outcome wasn't that good.  On the flip side, the worse possible outcome is pretty bad.

[piedpiper]

All good points. I certainly appreciate the input. Like I said, despite the fact that we are in a decent financial situation, we are financially clueless. I plan to do my best to read up on this topic before making any quick decisions and hopefully avoid some of the pitfalls that recent medical graduates fall into.

[artemis]

Zaphod wrote:

I didnt break even after 7.5 years, and still paid to “sell” the house. There are no guarantees.

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And I lost money selling a house I'd lived in for 13 years.  Bought the place new for $259k, put in $12k worth of landscaping and $25k in window replacements (not an optional upgrade, either - the builder-grade windows were leaking into the walls every time it rained), and sold it 13 years later for $261k, and I paid $10k of the buyers' closing costs.  God protect me from any more such investments!

Repeat after me:  your primary home IS NOT an investment!  Rentals are investments, and properly managed should produce some cash flow.  Your house, in contrast, is just where you live.

Edited to add:  And if you think my story is bad, consider one of my colleagues.  He owns a house in Tucson.  He doesn't WANT a house in Tucson, but he can't sell it for anything near what he paid for it, and so has been forced to keep it as a rental.  And the house he bought here in Omaha has a number of very serious problem, the chief of which is that the builder didn't properly grade the site or waterproof the foundation correctly, so the finished basement floods whenever we get a heavy rain.  $50k of remediation later, and my colleague thinks the problem may finally be solved, but now he's tied up with litigation against the builder.  Houses have the potential to be MAJOR money pits!

[adventure]

jfoxcpacfp wrote:

1. Possibly, but you also have the opportunity to invest the inheritance into a diversified basket of equity mutual funds over the next 5 years rather than concentrate all in real estate. Would you put the whole inheritance into one REIT fund? (I hope not.) Then why further strain the soup to a single house? If you’re flexible on your purchase date after graduating training, you can almost certainly outstrip any gain to be had by putting all of your eggs in one basket.


2. Not a good argument. Do better research. Anecdotal evidence only proves that an anecdote exists.


3. Worst argument. When has “everybody else” ever been right about investing?

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I respectfully slightly disagree with you on #2... You are correct it is an anecdote, but it is also a valid point that OP identified a risk (bad landlord), and buying is a way to mitigate said risk.

 

[jfoxcpacfp]

adventure wrote:

I respectfully slightly disagree with you on #2… You are correct it is an anecdote, but it is also a valid point that OP identified a risk (bad landlord), and buying is a way to mitigate said risk.

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While I appreciate your respectful slight disagreement   , it's not any different (imho) than if the roof had leaked in the last 2 houses he had lived in so he didn't want to be a homeowner. You could say I was addressing the random nature of the "risk", mitigation of which could lead to another random risk. Back to anecdotes.